By Madhusha Thavapalakumar Two leading banks that did not comply with the Average Weighted Prime Lending Rate (AWPR) cut requirement imposed by the Central Bank of Sri Lanka (CBSL) before the stipulated time period have escaped from penalties of the Central Bank, only being subjected to name-shaming. Sri Lanka's largest private bank Commercial Bank of Ceylon PLC and the country's second biggest state bank People’s Bank failed to comply with the requirement as they fell short of 29 basis points and 16 basis points, respectively. Howevver, they have managed to bring down their rates in compliance with the requirement in the subsequent weeks of the deadline and currently have two of the lowest AWPRs among the big banks. During the eighth and final Monetary Policy Review of 2019 held on 27 December, CBSL Senior Deputy Governor Dr. P. Nandalal Weerasinghe stated that they would impose certain penalties or sanctions on banks that failed to comply as it would otherwise be unfair on the banks that complied with the requirement before the deadline. Speaking to The Sunday Morning Business on Thursday (16), CBSL Deputy Governor H.A. Karunaratne noted that penalties will not be imposed on these two banks if they comply with the requirement before the next lending rate review. According to recent data, Commercial Bank’s and People’s Bank’s lending rates were recorded as 9.56 and 9.60 as at 17 January, respectively – a reduction of 252 basis points and 289 basis points, respectively. However, he added that naming the banks which did not comply with the requirement in itself is considered a punishment. “The first punishment is naming the banks that failed to comply. We have already done it and that would be shameful and damaging for the banks,” Karunaratne added. Karunaratne further noted that penalties for the banks that have not complied yet with the lending rate requirement will be decided by the Monetary Board in their next meeting. On 5 this month, The Sunday Morning Business reported that in the final week of the deadline, Sampath Bank PLC and DFCC Bank PLC managed to avoid the Central Bank penalties with a remarkable reduction of their lending rates, while Commercial Bank and People’s Bank failed to comply. A week before the deadline, CBSL named Sampath Bank and DFCC Bank, along with People’s Bank, as being likely to face penalties based on their weekly AWPRs as at 20 December 2019. While People’s Bank failed to lower its AWPR by 250 bps by the deadline, Sampath Bank and DFCC Bank lowered theirs by 99 basis points and 65 basis points, respectively, surpassing the 250 bps target. On the other hand, Commercial Bank, which had not been flagged by CBSL on 20 December as its AWPR stood at 9.84%, has in fact ended up below the target. While it was required to reduce its AWPR by only 26 bps in the last week, its AWPR rose by 3 bps to 9.87%, resulting in a final deficit of 29 bps. Its AWPR was calculated at 12.07% as at 26 April 2019. In sharp contrast, Sampath Bank lowered its AWPR from 10.43% to 9.44% within these seven days. Compared to its lending rate of 12.95% on 26 April last year, Sampath Bank had reduced its AWPR by 251 basis points by 27 December. DFCC Bank, the other large bank that was flagged by the CBSL, managed to lower its AWPR by 11.9% to 11.25% in the final week. Compared to its AWPR on 26 April, as of 27 December, DFCC had reduced its AWPR by 259 basis points from 13.84%. The requirement The AWPR reductions were mandated by an order issued in September, requiring every licensed commercial bank to reduce their AWPRs by at least 250 basis points by 27 December 2019, compared to their AWPRs as at 26 April 2019. The weekly AWPR is the weighted average rate of interest rates applicable on short-term loans and advances granted by commercial banks to their prime customers during a particular week. As at 27 December, eight banks were yet to meet the AWPR reduction target, in addition to Commercial Bank PLC. The most prominent among them was state-owned People’s Bank, which had fallen short by 16 basis points from the required 250 bps reduction. People’s Bank’s AWPR on 26 April 2019 was 12.49% and it came down by 234 basis points to 10.15% on 27 December. From 20-27 December, People’s Bank’s AWPR reduced by 35 points. Other banks that failed to comply were Indian Overseas Bank, MCB Bank Ltd., Public Bank Berhad, Standard Chartered Bank PLC, Amãna Bank PLC, and Axis Bank Ltd. by a shortfall of 154 bps, 231 bps, 87 bps, 173 bps, 221 bps, and 166 bps, respectively. Bank of Ceylon complied with the requirement with a basis point reduction of 264 to 10.24% as of 27 December, compared to 12.88% on 26 April. Hatton National Bank PLC reduced its lending rates by 259 basis points to 9.68% on 27 December from 12.27% on 26 April 2019. Seylan Bank PLC reduced its lending rate as at 27 December to 10.44%, compared to 14.22% on 26 April by 378 basis points. Amongst the banks that complied with the requirement, Union Bank of Colombo had made a significant reduction in their lending rate by reducing 596 basis points, more than double the requirement. Their lending rate on 27 December was 10.72% compared to 16.68% on 26 April 2019. Pan Asia Banking Corporation reduced their lending rate by 259 basis points to 12.9% on 27 December from 15.49%. National Development Bank PLC (NDB) reduced their rate by 258 basis points to 10.25% from 12.83% on 26 April, while HSBC Sri Lanka reduced their lending rate by 100 basis points to 8.84% from 9.84% on 26 April and Nations Trust Bank PLC (NTB) reduced by 256 basis points to 9.89% from 12.45% in the last week of April. On 24 September 2019, the CBSL ordered licensed commercial banks (LCBs) to reduce the weekly AWPR by 150 basis points by 1 November and by at least 250 basis points by 27 December, compared to the AWPR as at 26 April 2019. This cap was mainly imposed to increase private sector credit growth as the Year-on-Year (YoY) growth of credit disbursed to the private sector by LCBs during the first seven months of 2019 grew slower than the corresponding period last year. Penalties CBSL Senior Deputy Governor Dr. Weerasinghe, addressing the press briefing of the eighth and final Monetary Policy Review of 2019, noted that while there were smaller banks such as Axis Bank Ltd., Public Bank Sri Lanka, and Cargills Bank Ltd., which had also failed to comply with the directive, the main impact on private sector credit growth was from the noncompliance of bigger banks. In November, The Sunday Morning Business exclusively reported that the banking industry had largely fallen in line with the CBSL lending rate caps, with six banks having even reaching the rates specified for December at the time. Meanwhile, the weekly AWPR came under 11% for the first time in more than a year in July 2019. The prime lending rate is the interest rate charged by Sri Lanka’s banks from their largest, most secure, and most creditworthy customers on short-term loans. This rate is used as a guide for computing interest rates for other borrowers. The weekly AWPR is the average prime lending rate among banks in a particular week. A lower rate means more access to finance for businesses and entrepreneurs, enabling greater economic activity and growth. A week into the Easter Sunday incident, the AWPR went up to 12.24% from 11.99%, while during the political turmoil, which erupted on 26 October 2018 and lasted 51 days, the lowest AWPR was 11.81% while the highest was 12.28%.